This article outlines key steps to invest your wealth, whether modest or substantial. These suggestions are indicative; your decisions should consider your risk tolerance and investment horizon.
Step 1: Build an Emergency Fund
Before any investment, start by establishing an emergency fund equivalent to 3 to 6 months of expenses (not income). This capital should remain accessible and secure, ideally placed in a high-yield savings account currently offering around 4% interest. Don’t limit yourself to your primary bank; look for an FDIC-insured solution up to $250,000 to ensure your money is protected even if the bank fails.
Step 2: Maximize Your 401(k)
If you have cash between $0 and $23,500 (or more if you’re over 50 or 60), prioritize maximizing your 401(k) through your employer or a solo 401(k) if you’re self-employed. This retirement savings plan reduces your taxes and prepares for your future.
Step 3: Utilize a Roth IRA
For cash between $23,500 and $30,500, consider maximizing a Roth IRA, which offers attractive tax advantages. Be mindful of income limits; if you exceed these thresholds, you can still use a backdoor Roth IRA conversion.
Step 4: Additional Investments
Once these foundations are in place, consider allocations for the remainder of your wealth. Here are some suggestions, with indicative amounts that may vary based on your needs:
Between $30,500 and $150,000:
– Brokerage Account: Invest in a mix of bonds and stocks suited to your investment horizon.
– After-tax 401(k): If available, maximize it.
– 529 Plans: If your children plan to attend college in the U.S., these accounts can be advantageous.
Between $150,000 and $2 million:
– Rental Real Estate: Consider investing in rental property (excluding your primary residence), limiting the portion of your liquid assets tied up to 30%. For example, with $100,000 in capital (or $300,000 with leverage), you could invest in:
– A tangible property.
– REITs (Real Estate Investment Trusts) for greater liquidity.
Note: Tangible real estate involves constraints (tenant management, repairs) and is less liquid. If borrowing at high rates, the investment’s profitability must justify this cost. Generally, this type of investment isn’t advised with current high rates, but it depends on individual cases.
It’s also possible to borrow up to 85% of your invested money (excluding retirement accounts). The borrowing rate is very attractive (4.5% at the time of writing), and you can use the borrowed funds as you wish.
Between $2 million and $14 million:
– Purchase an entire income-generating property.
– Diversify with alternative investments, though these are less regulated and liquid than financial markets.
– Continue investing in financial markets, possibly using more sophisticated solutions.
Step 5: Wealth Over $14 Million
For very high net worth, advanced strategies become necessary to optimize wealth transfer and reduce the U.S. estate tax (40%). These strategies include creating trusts and LLCs, requiring thorough planning with experts.
Conclusion
Regardless of your wealth amount, a well-thought-out investment strategy rests on three essential pillars: securing your basic savings, maximizing advantageous tax tools, and diversifying your investments. Always tailor your choices to your goals, investment horizon, and risk tolerance.
Your advisor,
Guillaume
Guillaume Decalf is a financial advisor registered with the SEC (CRD #7003690 – Firm CRD #298549). He is the founder of the We Financial Group, an independent firm specializing in financial planning and investments. He has advised over 600 households and oversees more than $100 million in assets under management (as of 12/31/2024).
Being registered with the SEC does not constitute an endorsement of competence or quality of service. More information at adviserinfo.sec.gov.
